Q4 Results Review Report - April 22, 2022 - HDFC Securities

HCL Technologies: HCL Tech (HCLT IN) posted soft Q4 growth, impacted by a steep decline in the P&P business, with subsequent impact on margins (in-line). Revenue guidance of 12-14% CC (vs. 12.7% CC in FY22) implies a 2.4-3.2% CQGR, supported by USD 8.2bn net-new TCV signings and P&P base impact, but without any contribution from mega deals. Key positives include (1) momentum in IT and BS (>4% CQGR over the past three quarters), supported by mode-2 acceleration; (2) 31% rise in FY22 deal annual contract value (ACV) and strong commentary on pipeline aiding growth visibility; (3) P&P recovery in the medium term, with increase in subscription and support composition (currently 67% of P&P revenue) as well as growing services cross-sell (10% of services pipeline from product client base); and (4) payoff from accelerated investments in geo expansion (-100bps margin impact in FY22) plus pricing lever in mode-2 to keep margin at midpoint of the guided EBITM band of 18-20%. Maintain ADD with a TP of INR 1,290, valuing HCLT at 21x FY24E EPS. The risk-reward seems favourable, based on <18x FY24E and FCF/dividend yield of >4% each.

Nestle India: Nestle reported a beat on revenue, while EBITDA margin was below our expectations. Domestic revenue growth was at 10% (+10% three- year CAGR), with healthy volume and mix growth. Despite a sluggish demand environment, Nestle was able to sustain healthy volume-led growth, driven by its RURBAN strategy (good traction across rural, small towns, and urban agglomerates). Exports remain weak, down by 1% YoY, due to a change in product mix. Gross margin was at 55.4% (-313bps/-164bps YoY/QoQ), slightly lower than expected (HSIE 56%). Key RM costs remained at long-term highs. EBITDA was up 1/7% YoY/three-year CAGR (HSIE +4% YoY), led by the company's cost-saving initiatives. We remain positive on OOH products and sustain growth for in-home products. RM cost continues to be elevated, which poses a risk to the EBITDA margin in the near term. We maintain our EPS estimates for CY22E/CY23E and value Nestle at 52x P/E on Mar-24E EPS to derive a TP of INR 16,800. With a rich valuation, the absolute upside is limited in the medium term, making the risk-reward unattractive. Maintain REDUCE.

Tata Elxsi: Tata Elxsi (TELX IN) delivered a strong Q4, with 7.4/30.9% QoQ/YoY growth, and closed FY22 with 34% growth. Growth was broad- based across EPD/IDV and, within EPD, across the verticals of transportation, media & communications, and healthcare. Management commentary on demand, pipeline, and hiring remains strong. Over the past two years, TELX has doubled its profit (FCF up >75%), with EBITDAM catapulting from 21% in FY20 to 31% in FY22, supported by superior delivery metrics (offshore-led and lower sub-con dependence). From here on, we expect the EPS to double over three years (revenue-led), with steady margins and ~40% RoCE. Yet, these base case assumptions seem adequately priced in and there's a low margin of safety at 56x FY24E; the implied USD revenue growth rate over FY22-31E is ~25% CAGR at current valuation. Maintain SELL, with a TP of INR 7,050, valuing TELX at 50x FY24E EPS. TELX' valuation premium builds in growth premium (both absolute and relative), delivery strengths, a strong balance sheet, and efficiency metrics.

L&T Technology Services: L&T Technology Services (LTTS) result came in line, with revenue growth at 3.6% QoQ CC and sustained EBITM at 18.6%. The management has guided for revenue growth guidance of 13.5-15.5% in FY23E (vs +19.5% achieved in FY22), which implies a CQGR of ~3.4% QoQ (vs a 4.1% CQGR in FY22), impacted by softness in industrial products and medical devices. Key positives include (1) six deal wins of TCV >USD 10mn, which include one deal of USD 100mn+ TCV in EACV and another of USD 25mn+; (2) traction in the transportation vertical (also reflected in peer companies), led by electric, connected, and autonomous; and (3) growth in plant engineering, with EPCM and digital services momentum. The industrial product vertical may face challenges in the near term due to client-specific issues and the medical device vertical is expected to exhibit protracted improvement in FY23E. The management has retained its outlook of hitting USD 1bn revenue rate by Q2-Q3FY23E and expects to maintain >18% EBIT margin in FY23E. We cut our earnings estimate by -3/-7% for FY23/24E, factoring in revenue growth at midpoint of its guided range. Maintain REDUCE with a TP of INR 4,340, valuing LTI at 35x FY24E EPS (38x earlier and 28x being its historical average).

Angel One: ANGELONE printed 15% growth in topline sequentially on a strong base (15% Q3), resulting in an 11% beat, led by better-than-estimated customer activity (higher average revenue-generating orders per customer) and stronger ancillary transactional revenue. We are comforted by ARGO's indicators of stabilisation, which include higher quality customer adds and improved activation levels. Controlled marketing and operating spends resulted in an all-time high EBITDA margin of 55%; nevertheless, management has guided that a strong focus on marketing and technology will be maintained in FY23E following the launch of Super app, with increased spending. Given the flat-fee model, ANGELONE is one of the best plays on the secular growth story in Indian capital markets and our highest-conviction BUY. We raise our FY22/23E earnings estimates by 13/23% based on management's strong commentary about targeted client additions in FY23E/24E, but trim our target multiple to 19x (from 20.5x) to account for higher costs of capital. We maintain BUY with an increased target price of INR2,050 (19x Sep-23 EPS).

Cyient: Cyient reported a soft quarter; revenue was down 0.4% QoQ CC (in line with our estimate) due to a soft DLM segment (-9.4% QoQ). The services segment growth was also muted (+1.6/11.3% QoQ/YoY CC), given the decline in rail transportation. The aerospace vertical was flat QoQ but the worst phase of commercial aerospace is over and growth will be led by avionics and MRO activity. The management has guided for 13-15% growth in services and high single growth for DLM. The margin guidance stands at 13-14% which is slightly better than FY22. The services guidance is baking in recovery in aerospace and transportation (revival in H2) and continued growth in communications. The TCV, at USD 135mn, was up 48% YoY, citing growth uptick. The margin challenges will continue and onsite wage inflation is a bigger challenge. We maintain our EPS estimate but lower the multiple to 20x, to factor in inferior growth metrics compared to ER&D peers and increasing global uncertainty. The target price of INR 1,120 is based on 20x Mar-24E EPS. The stock is trading at 17/15x FY23/24E, a steep discount of ~57% to LTTS. Maintain BUY.

Source : Equity Bulls

Keywords

Q4FY22 ResultsReview HDFCSecurities HCLTechnologies NestleIndia TataElxsi LTTS AngelOne Cyient